Economics: Supply and Demand and Price Elasticity
MBAAF 601
Managerial Economics
Problem Set # 2
Demand, Supply and Elasticity
1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.
a. Sam pays a storekeeper $1 for a quart of milk.
b. Sally earns $4.50 per hour working at a fast food restaurant.
c. Serena spends $7 to see a movie.
d. Stuart earns $10,000 from his 10 percent ownership of Acme Industrial.
2. What is a competitive market? Briefly describe a type of market that is not perfectly competitive.
3. What are the demand schedule and the demand curve and how are they related? Why does the demand curve slope downward?
4. Popeye’s income declines, and as a result, he buys more spinach. Is spinach an inferior or a normal good? What happens to Popeye’s demand curve for spinach?
5. What are the supply schedule and the supply curve and how are they related? Why does the supply curve slope upward?
6. Does a change in producers’ technology lead to a movement along the supply curve or a shift in the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the supply curve?
7. Describe the role of prices in market economies.
8. List and explain the four determinants of the elasticity of demand.
9. How did elasticity help explain why drug interdiction could reduce the supply of drugs, yet possibly increase drug related crimes?
10. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?
a. Required textbooks or mystery novels
b. Beethoven recordings or classical music recordings in general
c. Heating oil during the next six months or heating oil during the next five years
d. Root beer or water
11. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:
PRICE QUANTITY DEMANDED
Managerial Economics
Problem Set # 2
Demand, Supply and Elasticity
1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.
a. Sam pays a storekeeper $1 for a quart of milk.
b. Sally earns $4.50 per hour working at a fast food restaurant.
c. Serena spends $7 to see a movie.
d. Stuart earns $10,000 from his 10 percent ownership of Acme Industrial.
2. What is a competitive market? Briefly describe a type of market that is not perfectly competitive.
3. What are the demand schedule and the demand curve and how are they related? Why does the demand curve slope downward?
4. Popeye’s income declines, and as a result, he buys more spinach. Is spinach an inferior or a normal good? What happens to Popeye’s demand curve for spinach?
5. What are the supply schedule and the supply curve and how are they related? Why does the supply curve slope upward?
6. Does a change in producers’ technology lead to a movement along the supply curve or a shift in the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the supply curve?
7. Describe the role of prices in market economies.
8. List and explain the four determinants of the elasticity of demand.
9. How did elasticity help explain why drug interdiction could reduce the supply of drugs, yet possibly increase drug related crimes?
10. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?
a. Required textbooks or mystery novels
b. Beethoven recordings or classical music recordings in general
c. Heating oil during the next six months or heating oil during the next five years
d. Root beer or water
11. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:
PRICE QUANTITY DEMANDED